Greenspan: Fed unaware of subprime threat

Tuesday

Oct 22, 2013 at 12:01 AMOct 22, 2013 at 5:15 AM

WASHINGTON - For 18 1/2 years as Federal Reserve chairman, he was rhapsodized for helping drive a robust U.S. economy. Yet after he stepped down in 2006, he was engulfed by accusations that he helped cause the 2008 financial crisis - the worst since the 1930s.

WASHINGTON — For 18 1/2 years as Federal Reserve chairman, he was rhapsodized for helping drive a robust U.S. economy. Yet after he stepped down in 2006, he was engulfed by accusations that he helped cause the 2008 financial crisis — the worst since the 1930s.

Now, Alan Greenspan has struck back at any notion that he — or anyone — could have known how or when to defuse the threats that triggered the crisis. He argues in a new book, The Map and the Territory, that traditional economic forecasting is no match for the irrational risk-taking that can inflate catastrophic price bubbles in assets such as homes or tech stocks.

In an interview, Greenspan, 87, reflected on his Fed tenure. Some edited excerpts:

Q: You write that you were shaken by the 2008 financial crisis because of the failure of one of the pillars of a stable financial market — “rational financial risk management.”& amp; amp; amp; amp; amp; lt; /p>

A: Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. ... Contagion is the critical phenomenon which causes the thing to fall apart.

Q: When you published Age of Turbulence in 2007, you were being hailed as a “maestro” of the global economy. Then the worst financial crisis since the 1930s erupted. Your policies as Fed chair were blamed for sowing the seeds for that crisis. How did the criticism affect you personally?

A: I’ve been around long enough to know that a good deal of the praise heaped on me I had nothing to do with. ... Did (the criticism) bother me? Of course it bothered me. But I’ve been around long enough to have ups and down. So you get over it.

Q: With the knowledge you gained from the financial crisis, has it changed your own assessment of how well you performed as Fed chairman?

A: The real question is, should I have done something different? And the answer to that question is no. Did we make mistakes? You bet we made mistakes. But I thought our record was fairly good.

Q: A lot of criticism centers around the failure of the Fed and other regulators to deal with the explosion of subprime mortgages, which were packaged into securities that then turned bad and were at the center of the troubles. Should the Fed have handled subprime mortgage regulation differently?

A: The problem is that we didn’t know about it. It was a big surprise to me how big the subprime market had gotten by 2005. ... Could we have caught it? I don’t know.

Q: You got to know Larry Summers during his eight years at the Treasury Department, and you also worked with Janet Yellen when she was a member of the Fed board. Can you talk about both of them?

A: (Larry) is very smart, and he is unquestionably qualified for most any job you can think of. But then so is Janet. There were times when I came to her and I said, “I don’t understand what this academic is saying.” And she would explain it to me.

Q: Should the Fed start reducing its $85 billion a month in bond purchases?

A: Paul Volcker (his predecessor as Fed chairman) was very thoughtful. He never commented on Fed policy. I don’t comment. They have got enough problems.